FedEx upbeat on outlook despite lower profit

By IBT Staff Reporter On 09/17/09 AT 2:16 PM

FedEx Corp reported a 53 percent drop in quarterly profit on Thursday as the worldwide economic downturn continued to weigh on shipping volumes.

But the package delivery giant and economic bellwether said most of its markets were continuing to show signs of improvement, raising the prospect of a wider rebound that might help lift other companies and sectors out of the slump.

Confidence appears to be improving, the housing sector seems to have bottomed and the auto sales have picked up, Fred Smith, FedEx's chairman, chief executive and president, said during a conference call to discuss the results.

These are encouraging signs of a more stable economy.

Smith also predicted that the U.S. economy would grow by 3 percent in the third quarter, 4.9 percent in the fourth quarter and 2.9 percent in 2010.

The tide is rising, said Dan Ortwerth, an analyst at Edward Jones. And volumes are improving faster than I thought.

FedEx said it planned to increase U.S. shipping rates an average of 5.9 percent for U.S. domestic and U.S. export services, effective January 4 -- a sign of confidence in a market where excess capacity had been pressuring pricing.

Helane Becker, managing director at Jesup & Lamont Securities, who follows FedEx, said the rate hikes were the latest in an industry that is beginning to stabilize thanks to rebounding economies, especially outside the United States.

Lufthansa announced a 25 percent rate increase in August, Becker said. AirFrance-KLM announced 20 percent rate increases. I think taking Express rates up 5.8 percent (core rate up 3.8 percent) is not inconsistent with the market. Also, that is their base rate; corporate customers with large volumes will get discounts off the 'rack rate.'

SOME MARKETS STILL PRESSURED

FedEx reported a profit of $181 million, or 58 cents a share, for the first quarter that ended on August 31, down from $384 million, or $1.23 a share, a year earlier.

Revenue fell 20 percent to $8.01 billion.

Lower energy prices weighed on the company's numbers, resulting in what FedEx characterized as a substantial decline in fuel surcharges. But it said the planned rate increase in the new year will help offset declining revenues from the surcharges, which lag real-time prices and had helped boost profitability over the past year as oil prices plummeted.

FedEx's main U.S. rival, United Parcel Service , has not disclosed plans to raise 2010 rates, though the two companies tend to track one another closely.

The exit of DHL, Deutsche Post AG's U.S. domestic package unit, from the market in January has strengthened the hand of the two remaining players.

The luxury of operating as a duopoly affords FedEx and UPS the opportunity to practice rational pricing, said Morningstar analyst Keith Schoonmaker.

The exception, Schoonmaker said, would be the carriers' less-than-truckload (LTL) businesses, which operate in highly fragmented markets and where rivals bid rates down to win business and improve their asset utilization.

NO SURPRISE

The results announced on Thursday were better than FedEx had originally forecast, but were not a surprise.

Last week, the Memphis, Tennessee-based company preannounced its results, saying it would report first-quarter earnings of 58 cents a share and second-quarter earnings in a range of 65 to 95 cents -- an outlook it reiterated on Thursday. At the time, the company said it was benefiting from an increase in international priority shipments and cost controls.

Before the preannouncement, analysts had expected FedEx to report earnings of 43 cents a share for the first quarter and 70 cents for the second quarter.

FedEx shares, which jumped more than 6 percent last week when the company preannounced, gave back some of those gains on Thursday. They were last down 2.8 percent at $75.99 on the New York Stock Exchange.